The Obama Gap

The Obama Gap

“I don’t believe it’s too late to change course, but it will be if
we don’t take dramatic action as soon as possible. If nothing is done,
this recession could linger for years.”

So declared President-elect Barack Obama on Thursday, explaining why
the nation needs an extremely aggressive government response to the
economic downturn. He’s right. This is the most dangerous economic
crisis since the Great Depression, and it could all too easily turn
into a prolonged slump.

But Mr. Obama’s prescription doesn’t live up to his diagnosis. The
economic plan he’s offering isn’t as strong as his language about the
economic threat. In fact, it falls well short of what’s needed.

Bear in mind just how big the U.S. economy is. Given sufficient
demand for its output, America would produce more than $30 trillion
worth of goods and services over the next two years. But with both
consumer spending and business investment plunging, a huge gap is
opening up between what the American economy can produce and what it’s
able to sell.

And the Obama plan is nowhere near big enough to fill this “output gap.”

Earlier this week, the Congressional Budget Office came out with its
latest analysis of the budget and economic outlook. The budget office
says that in the absence of a stimulus plan, the unemployment rate
would rise above 9 percent by early 2010, and stay high for years to
come.

Grim as this projection is, by the way, it’s actually optimistic
compared with some independent forecasts. Mr. Obama himself has been
saying that without a stimulus plan, the unemployment rate could go
into double digits.

Even the C.B.O. says, however, that “economic output over the next
two years will average 6.8 percent below its potential.” This
translates into $2.1 trillion of lost production. “Our economy could
fall $1 trillion short of its full capacity,” declared Mr. Obama on
Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion — possibly a lot more, if
the budget office projections turn out to be too optimistic — Mr. Obama
offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In
addition to the direct effects of, say, investment in infrastructure on
demand, there can be a further indirect effect as higher incomes lead
to higher consumer spending. Standard estimates suggest that a dollar
of public spending raises G.D.P. by around $1.50.

But only about 60 percent of the Obama plan consists of public
spending. The rest consists of tax cuts — and many economists are
skeptical about how much these tax cuts, especially the tax breaks for
business, will actually do to boost spending. (A number of Senate
Democrats apparently share these doubts.) Howard Gleckman of the
nonpartisan Tax Policy Center summed it up in the title of a recent
blog posting: “lots of buck, not much bang.”

The bottom line is that the Obama plan is unlikely to close more
than half of the looming output gap, and could easily end up doing less
than a third of the job.

Why isn’t Mr. Obama trying to do more?

Is the plan being limited by fear of debt? There are dangers
associated with large-scale government borrowing — and this week’s
C.B.O. report projected a $1.2 trillion deficit for this year. But it
would be even more dangerous to fall short in rescuing the economy. The
president-elect spoke eloquently and accurately on Thursday about the
consequences of failing to act — there’s a real risk that we’ll slide
into a prolonged, Japanese-style deflationary trap — but the
consequences of failing to act adequately aren’t much better.

Is the plan being limited by a lack of spending opportunities? There
are only a limited number of “shovel-ready” public investment projects
— that is, projects that can be started quickly enough to help the
economy in the near term. But there are other forms of public spending,
especially on health care, that could do good while aiding the economy
in its hour of need.

Or is the plan being limited by political caution? Press reports
last month indicated that Obama aides were anxious to keep the final
price tag on the plan below the politically sensitive trillion-dollar
mark. There also have been suggestions that the plan’s inclusion of
large business tax cuts, which add to its cost but will do little for
the economy, is an attempt to win Republican votes in Congress.

Whatever the explanation, the Obama plan just doesn’t look adequate
to the economy’s need. To be sure, a third of a loaf is better than
none. But right now we seem to be facing two major economic gaps: the
gap between the economy’s potential and its likely performance, and the
gap between Mr. Obama’s stern economic rhetoric and his somewhat
disappointing economic plan.

Further

In the face of increasingly catastrophic climate news - rising sea levels, wildfires, drought - a team of Russian photographers with the non-profit AirPano have taken to the air in helicopters, airplanes, dirigibles and hot air balloons to offer virtual and panoramic tours of the planet's most stunning locations, urban to wilderness, to remind us what's at stake. Take note.